Entrepreneurial Pecking Order

What do you think about when you hear of an ‘entrepreneur’? Most of us are immediately impressed, imagining a Mark Zuckerberg or Wall Street tycoon; but, what about the scores of entrepreneurs you never heard about? Sure, there are those kinds too! Where do entrepreneurs in the making go to accelerate their chances of becoming a Zuckerberg? They go to ‘accelerators,’ businesses such as Y Combinator and TechStars, two of the most popular startup-training/seeding hubs; yet the WSJ observes more than 200-plus existing businesses worldwide.

Within 12-week programs, aspirants are offered seed funding and intimate counseling in exchange for about 6% equity stake. Applicants are abundant (sometimes more than 1,500 apply for only 12 spots.) The success rate is not, which makes some wonder whether such ‘accelerators’ are actually beneficial. Moreover, some question whether these businesses are taking hopefuls for a ride.

One member of a private community of tech professionals urges entrepreneurs to research the accelerators first. Many times, accelerators will pump hopefuls full of promise of receiving funding; however, many accelerators lack the resources to catapult their students to stardom. Critics say the best accelerators take no more than 10% of a startup’s equity.

Additionally, some observe how accelerators business models are formed to profit regardless of how students fare:

If an accelerator gives $25,000 in capital to participants, takes a 5% equity stake, and graduates 40 companies in a year, it can break even if just one gets acquired for $20 million, even if the other 39 fail.

A director at a VC firm found that 45% of 29 North American accelerators didn’t have graduates that went on to recruit funding. Professionals warn that success is slim even regarding the top programs (only 0.1% of firms, less than five years old receive seed or early-funding money from VCs).

Entrepreneurs beware; most accelerators are established as seed funds, making them easy and cheap to create. The accelerators make revenue when a startup is acquired, goes public, or sells stakes to a venture investor.

It seems like most elements of business, startups need to approach accelerators with due diligence and understand the odds are against them. Does it mean startups shouldn’t give it a go? Not at all; but, startups (especially) need to mind their scarce financial resources.